£3bn tax hike will pay for Budget giveaways

Taxes will need to increase by up to £3bn if Philip Hammond’s Wednesday Budget is to meet spending commitments, according to economic experts.

As well as extra cash for social care, the Chancellor will also announce moves to protect small companies from massive increases in business rates, and boost technical education.

And a further freeze fuel duty is expected, meaning spending commitments of between £2bn and £3bn.

However, the Chancellor will be forced to make changes to the tax system since he has has ruled out extra borrowing to cover the cost of his plans.

Another constraint is the Tories’ pledge that income tax will not be increased over the course of the Parliament.

A likely target is an increase in the rates of national insurance paid by the self-employed to bring them in line with employees.

Tobacco target

The move could potentially raise £1.5bn a year for the Treasury, although it could be more narrowly targeted at better-off earners to avoid accusations that Mr Hammond is hitting “strivers”.

The Chancellor could announce a further rise in the insurance tax premium, change the rules on capital gains tax or restrict pension relief for the highest earners as a way of raising extra revenue.

He also looks certain to announce a sharp increase in the cost of tobacco.

According to reports, the prices of packet of 20 cigarettes could go up by 50p.

There could also be small rises in alcohol duties. Chris Giles, head of tax policy at Ernst and Young, said: “If he is going to have to go and spend, then it’s likely he is going to want to raise taxes at the same time.”

Alex Henderson, senior partner at PwC, said: “There has been a long tradition of fiscally-neutral budgets during the financial crisis.

“Every budget has had some area of giveaways. But they have always been balanced to a greater or lesser extent and I wouldn’t expect this to be any different.”

Social care spending injection

Mr Hammond’s centrepiece announcement is expected to be a £1.3bn injection into social care spending. It follows moves in December to allow local authorities to collect another £900m over two years through council tax for social care.

The move would be politically popular – a Local Government Association survey found 78 per cent of MPs want councils to get more cash towards social care.

Hundreds of millions of pounds will be allocated by the Chancellor for easing the impact of business rate changes on small firms.

The reforms have brought angry warnings from MPs that independent retailers and pubs could face swingeing rises while internet traders on out-of-town estates will escape the pain.

He will also announce a shake-up of technical education, including the launch of new qualifications, at an eventual annual cost of £500m.